Banks' forex buying drops sharply

The central bank is unlikely to ease monetary policies in the near future despite the significant slowdown of capital inflows and less liquidity in May, analysts said Sunday.

"Capital flows depend on the status of a country's macroeconomy, monetary policy and capital control. With China's slowing economy, insufficient market opportunities and tighter control of capital inflows, capitals may flow out to invest in other markets," Tan Yaling, head of the China Forex Investment Research Institute, told the Global Times Sunday.

"Despite the slowdown of capital inflows, the growth of money supply still outpaces the growth of the real economy, and so the central bank is unlikely to ease monetary policy very soon," Tan said.

China's central bank and commercial lenders bought a net 66.86 billion yuan ($10.9 billion) of foreign currency in May, down 77 percent from April's 294.35 billion, data released by the People's Bank of China, the country's central bank, showed Friday.

It was the lowest figure this year and the first time the net purchase of foreign currencies had dropped below 100 billion yuan since December.

The figure is usually viewed as a measure of foreign capital inflow because foreign currencies must be sold to Chinese banks when they enter the country as a means of capital control.

Smaller capital inflows mean less liquidity in the money market, which usually increases pressure on the central bank for monetary easing such as interest rate cuts to maintain money supply growth.

"We believe (the drop) is mainly due to the crackdown on capital flows by the State Administration of Foreign Exchange (SAFE) that started on May 5. This helps to explain why liquidity conditions tightened sharply in early June," Zhang Zhiwei, chief China economist at investment bank Nomura, said in a research note e-mailed to the Global Times Friday.

SAFE, China's foreign exchange regulator, launched a crackdown in May on illegal capital flows after China's trade with its trading partners posted extraordinary growth in March and April, prompting economists to suspect that some Chinese exporters could be overstating their trade flows to bypass capital controls and bring capital into China.

The crackdown resulted in a dramatic decline of China's trade in May. Total foreign trade volume grew only 0.4 percent year-on-year in May, a significant pullback from the 15.7 percent growth in April, customs data showed.

"There is no sign of upcoming monetary easing by the central bank despite continuous slowdown of the economy because the government has a greater tolerance for changes in GDP growth," said Yang Weixiao, an analyst with Lianxun Securities.

"The central bank may loosen monetary policies in later this year if economic growth hits the bottom at below 7.5 percent," Yang said.